Summary: Today’s jobs report shows the U.S. labor market remains in a strong groove, with payrolls up 157,000 last month as the unemployment rate ticked down to 3.9 percent. The broader underemployment rate (“U-6”)–a more comprehensive measure of labor market slack–fell to 7.5%, its lowest rate since 2001, thanks to more part-timers finding the full-time jobs they seek.
Wage growth, however, remains a sore spot and despite further tightening, did not accelerate.
Expectations were for a higher payroll number–190,000–but these monthly data are noisy. To better pull out the underlying signal, we apply JB’s monthly smoother that takes average job gains over 3, 6, and 12-month periods (these averages include a combined revision of 59,000 jobs added to the May and June payroll gains). As shown, trend growth rate for job growth is north of 200,000, a strong trend at this stage of expansion.
I dig deeper into the wage story below, but the figures below show year-over-year percent changes in hourly earnings for all private-sector workers and for middle-wage workers (blue-collar factory workers and non-managers in services), along with a 6-months average to smooth out the noise. Over the past year, average hourly earnings before inflation were up 2.7% last month for both groups, the same growth rate as in June. For all private-sector workers, yearly wage growth has stayed remarkably steady, growing between 2.6-2.8 percent since last December.
The moving average reveals a slight, welcome acceleration for middle-wage workers, but given recent pressures in topline consumer inflation (including energy prices), their real hourly wage growth is flat. Below, I offer a Q&A on these critical wage issues.
Broken “Breakevens?” Many labor market watchers have long maintained that the “breakeven rate” for job growth–the monthly payroll gain associated with a stable unemployment rate–is 100,000 or less. But as the smoother shows, over the past year, monthly job gains have averaged 200,000, twice the alleged breakeven rate. Meanwhile, the jobless rate hasn’t fallen particularly sharply–it’s wiggled around between the high-3’s and the low-4’s–implying more labor supply than the low breakeven number implies.
The labor force participation rate held steady at 62.9% last month–its same level as last July. But the closely watched employment rate for prime-age workers (25-54 year-olds) continues to slowly climb, up from 79.3% in June to 79.5% in July. The peak employment rate for this growth was 80.3% in January 2007, while its trough in 2011 was 74.8%. Thus, prime-age workers have recovered 4.7 out of 5.5 lost percentage points, or 85.5%, of their decline since the downturn.
All told, this is simply a technical way to suggest that we have probably not hit full capacity in the job market; there are still sideliners to be pulled in. Low, stable core inflation (last seen at 1.9 percent; inflation including energy prices has grown faster) and only slowly accelerating wage growth corroborate this suspicion that there’s more room-to-run in the job market than is commonly believed.
Wage Dive: There’s been a lot of wage commentary lately, which I’d like to take a quick stab at sorting out here, with more to come in a longer paper out soon.
For now, a quick Q&A:
Q: Is there a wage problem in the current labor market?
A: There is, as real wages for middle-wage workers, as in today’s data, are flat (growing at about the same rate as inflation), meaning the only way working families can grow their incomes is working more hours.
Q: Is that a function of slow nominal wage growth or faster inflation?
A: It’s really about faster inflation, most recently, as the figures below reveal. They plot the yearly growth rate of the mid-level wage against inflation (I’ve forecasted the July inflation value as it’s not out yet). The difference between the wage and the inflation lines represent real growth. As you see in this figure for an important sector for mid-wage workers–health care and education– inflation grew from very low levels and has caught up with pay rates in the sector.
At the same time, mid-level wage growth before inflation, as described above, has been slower in this recovery than in previous ones, especially at such low unemployment.
Q: What factors explain the faster prices and slower nominal wage growth?
A: Higher energy costs have been boosting prices (as noted, core inflation, which takes out energy and food, has been much tamer) of late, and these could trail off in coming months as oil supplies are up. The tariffs, especially if they escalate, could push prices up a bit, but topline inflation could slow in coming months, leading to faster real gains, especially if falling unemployment pushes up nominal wage growth.
Q: What other constraints are in play?
A: Economists point out that productivity growth puts a cap on real wage growth and there’s no question that a) the two variables are linked, and b) slow productivity is a constraint on current wage growth. But slow productivity growth certainly does not explain flat, mid-level real wages in such a tight job market. For example, business profits remain strong, firms are spending billions on share buybacks to boost their stock prices. If workers had stronger bargaining power, they could push for more profits to flow into paychecks.
And, of course, over the longer term, productivity has risen much faster than median compensation (see figure), again, a function of long-term, structural factors reducing worker bargaining power, including outsourcing of jobs, diminished union power, long periods of slack markets, eroding labor standards, and, especially in the Trump era, a politics that is incessantly hostile to workers and friendly to capital.
Q: Will lower unemployment give workers more clout?
A: It likely will. Thus, a potential, positive near-term scenario is lower unemployment pushing up nominal pay. Should that occur as energy prices come down, we’ll see real gains in coming months. But there are enough links in that chain that it’s no slam dunk, even in the near term. As just noted, the fact that worker power has been in long-term decline while concentrated employer power is ascendant remains a critical determinant of the living standards of working families.